A Collateralized Debt Position, or CDP, is a mechanism in decentralized finance where users lock digital assets to generate a loan. This process involves depositing cryptocurrency as collateral into a smart contract to mint a stablecoin or another digital asset, effectively creating a debt against the locked collateral. The value of the collateral typically exceeds the value of the minted asset to provide a buffer against market fluctuations. If the collateral value drops below a certain threshold, the position may be liquidated to repay the debt.
Context
CDPs are a foundational element of many DeFi lending protocols, enabling users to access liquidity without selling their underlying assets. Current discussions often focus on the efficiency of liquidation mechanisms and the stability of the stablecoins issued through these positions. Future developments may include more dynamic collateral types and improved risk management tools to enhance the resilience of CDPs against market volatility.
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